How the Obama Administration Developed the Stimulus

The most important question facing Obama that day was how large the stimulus should be. Since the election, as the economy continued to worsen, the consensus among economists kept rising. A hundred-billion-dollar stimulus had seemed prudent earlier in the year. Congress now appeared receptive to something on the order of five hundred billion. Joseph Stiglitz, the Nobel laureate, was calling for a trillion. Romer had run simulations of the effects of stimulus packages of varying sizes: six hundred billion dollars, eight hundred billion dollars, and $1.2 trillion. The best estimate for the output gap was some two trillion dollars over 2009 and 2010. Because of the multiplier effect, filling that gap didn’t require two trillion dollars of government spending, but Romer’s analysis, deeply informed by her work on the Depression, suggested that the package should probably be more than $1.2 trillion. The memo to Obama, however, detailed only two packages: a five-hundred-and-fifty-billion-dollar stimulus and an eight-hundred-and-ninety-billion-dollar stimulus. Summers did not include Romer’s $1.2-trillion projection. The memo argued that the stimulus should not be used to fill the entire output gap; rather, it was “an insurance package against catastrophic failure.” At the meeting, according to one participant, “there was no serious discussion to going above a trillion dollars.”

There were sound arguments why the $1.2-trillion figure was too high. First, Emanuel and the legislative affairs team thought that it would be impossible to move legislation of that size, and dismissed the idea out of hand. Congress was “a big constraint,” Axelrod said. “If we asked for $1.2 trillion, it probably would have created such a case of sticker shock that the system would have locked up there.” He pointed east, toward Capitol Hill. “And the world was watching us, the market was watching us. If we failed to produce a stimulus bill, that in and of itself could have had deleterious effects.”

There was also a mechanical argument against a stimulus of that size. Peter Orszag, who was celebrating his fortieth birthday that day, said that, while the argument for a bigger stimulus was sound theoretically, there were limits to how much money the government could practically spend in the near future.

Summers brought a third argument to the debate, one that echoed his advice to Bill Clinton sixteen years earlier, when his Administration was facing persistent budget deficits that Summers believed were suppressing economic growth. He, like Romer, was guided by an understanding that in financial crises the risk of doing too little is greater than doing too much. He believed that filling the output gap through deficit spending was important, but that a package that was too large could potentially shift fears from the current crisis to the long-term budget deficit, which would have an unwelcome effect on the bond market. In the end, Summers made the case for the eight-hundred-and-ninety-billion-dollar option.

Like Matt Yglesias, I wonder a bit why administrations aren't quicker to simply say to the American people that "we think the stimulus need to be $1.2 trillion, but Congress is only comfortable with $800 billion, and so we'll try that for now." Then, if the stimulus is too small, the administration gets to say "I told you so," as opposed to "it could have been worse."

The counter-arguments, presumably, are first, that passing even an $800 billion stimulus is a big lift, and it's not very helpful for the administration to be badmouthing its likely efficacy. Second, attacking Congress for their compromises leaves you with bad relationships in the chamber, and that destroys anything you might ever choose to do in the future. But who knows?

What actual, concrete evidence exists to suggest that the $800 billion dollar stimulus has been a "big lift"??

Prior to the stimulus, were there projections of higher unemployment rates absent stimulus funds? Were there projections of lower productivity absent stimulus funds? It's easy to now say "It could have been worse" as a cover for ineffectiveness -- but can anyone produce data-based predictions of greater doom?

What I find most interesting is that we had trouble finding 800 billion worth of projects that could get the money out the door in a timely fashion- for the people who wanted 50% more spending I just don't see how that problem would have been any better whatsoever. Its just really hard to wave a magic wand and put that much money out the door all at once without wasting a ton of it.

"[Summers] believed that filling the output gap through deficit spending was important, but that a package that was too large could potentially shift fears from the current crisis to the long-term budget deficit, which would have an unwelcome effect on the bond market."

I've been with the likes of Krugman and Reich all along--we needed a bigger stimulus. But I do wonder whether this concern about the bond market was/is justified.

Krugman makes a good argument that as a percentage of GDP, we're good. But does the bond market agree? (If you read the full article, Summers essentially killed the notion of "rational markets" [i.e., there's no such thing])

Set aside an hour, and read this New Yorker article about Summers. It's great stuff.